The Impact of India’s Rural Employment Guarantee on Demand for Agricultural Technology

Landless agricultural laborers and marginal farmers constitute much of India’s poor. As population growth increases and more people enter an expanding rural labor force, either they must eke out a living in the rural sector or add to the growing pressure on the country’s urban areas. Meanwhile, agricultural jobs are fewer and the corresponding wages have been persistently below subsistence levels. The Mahatma Gandhi National Rural Employment Guarantee Act (NREGA) takes aim at this problem by providing guaranteed employment to the rural poor at minimum wages in exchange for village public works. While the direct effects of this program appear clear—more income is being received by the poor, while village infrastructure is increasing—indirect effects within local agricultural economies abound. Theory developed in this paper shows the theoretical results of NREGA’s impact on agricultural wages, while recent empirical evidence demonstrates a 3-5% increase in agricultural wages. This has the potential to affect farm owners. A farm owner that relies on this targeted unskilled labor to fill relatively inexpensive labor roles during peak agricultural production periods may now alter his production decisions by choosing to adopt labor-saving technologies as a result of an increasing labor-to-capital input price ratios. I specify a threshold model of technology adoption to illustrate this short-run result. In the long run, there may be further ripple effects in the rural economy, including increased agricultural productivity and still higher wages for rural laborers. I use difference-in-differences and regression discontinuity designs to test my theoretical results empirically. These empirical methods take advantage of the unique nature of the phased program rollout.